Limited Asset Market Participation, Income Inequality and Macroeconomic Volatility17-12-2013
The years following the global 2007 financial crisis have witnessed growing concern for incomes inequality and for the distributional effects of macroeconomic policies. Historically, redistributive actions have been the domain of fiscal policies, but in recent years even monetary policies have come under scrutiny for their effects on inequality. For instance Coibion et al. (2012) document that in the US monetary policy contractions have substantial and persistent redistributive effects, increasing income and consumption inequality.
This paper investigates the link between inequality, macroeconomic volatility and monetary policy in a dynamic stochastic general equilibrium (DSGE) model characterized by Limited Asset Market Participation. The authors uncover a causality link between limited asset market participation, wealth/consumption inequality (only a fraction of the population holds wealth) and macroeconomic volatility. The paper also obtain that monetary contractions have redistributive effects in favor of asset holders, broadly confirming the findings in Coibion et al. (2012). Finally the paper analyzes the impact of redistributive fiscal policies that target consumption inequality between households groups. Such policies have beneficial implications for macroeconomic stability, bringing the dynamic performance of the model close to the one generated by representative-agent DSGE models.
The paper establishes the important result that redistributive fiscal policies are a prerequisite for macroeconomic stability and for the effectiveness of monetary policy. Further, at a time of faltering consensus for EMU and for ECB policies, it provides a framework for the analysis of the redistributive effects of ECB monetary policy actions and for the appropriate design of the fiscal policies that should limit their adverse redistributive effects.